Microsoft to pay Universal for every Zune sold

“Microsoft Corp. has agreed to pay Universal Music Group a fee for each new Zune digital music player it sells when the iPod rival launches next week, the companies said on Thursday,” Yinka Adegoke reports for Reuters.

“The groundbreaking deal could redefine the digital music business pioneered by Apple Computer Inc.,” Adegoke reports. “Microsoft is trying to break into an industry closely aligned with archival Apple, which is credited with nearly single-handedly building the legal Web music world with its iPod players and iTunes music store.”

Adegoke reports, “But Apple does not give a cut of sales of iPods to music companies. It only pays labels for songs sold on its iTunes music store.”

“‘We felt that any business that’s built on the bedrock of music we should share in,’ said Doug Morris, chief executive of Universal, owned by French media giant Vivendi,” Adegoke reports. “He did not disclose the amount of the fee for the Zune, which launches next Tuesday.”

“The iPod has a nearly 80 percent share of digital media player sales, and its iTunes music downloads site is also the dominant online music store,” Adegoke reports.

Adegoke reports, “Like other record companies, Universal has a revenue-share deal with iTunes but no share of iPod sales. ‘We have a current contract with him and at the end of that I’m sure we’ll negotiate,’ said Morris, whose company accounts for nearly one in three CDs sold in the United States. Morris said the deal could set a precedent in negotiations with other device manufacturers, including mobile phone makers, who are increasingly seeing music as important to the future of their businesses.”

Full article here.
We’ve been saying for quite awhile that Microsoft seems to want the Zune to fail; the choice brown, the muddled business plan, the crippled Wi-Fi, the hobbled DRM-laden “sharing”, the weak advertising, the fake scroll-wheel, the “uncoolness” of Microsoft, the lack of a compelling price advantage, the lack of video content, etc. But, we couldn’t figure out why Microsoft seems to want the Zune to fail. We thought maybe they needed a tax write-off or they were just mismanaged and/or deluded. But, maybe their “plan” is to set a precedent for the next round of iTunes Store negotiations? Perhaps Microsoft hopes to hurt Apple by trying to force this weird profit sharing on iPods?

To share hardware profits with the music labels makes no sense. Did phonograph makers share record player profits with music labels? No. Did Sony share Walkman profits with music labels? No. Do AM/FM radio makers share profits with music labels? No. Do TV makers share profits with TV networks and producers? No.

We do not see Zune becoming much of a success. Universal Music Group certainly isn’t going to get rich from Zune sales. We just can’t imagine Steve Jobs caving and sharing iPod revenue with the music labels; not with iPod+iTunes market-dominating clout.

As we’ve said before, if Zune, improbably, shows any real traction, Steve Jobs can simply license FairPlay to device makers and/or music outfits (already smarting from being stabbed in the back by Microsoft’s abandonment of “PlaysForSue”) and consign Microsoft Zune to a quick death by isolation.

One would safely assume that Apple can draw up the licenses at very favorable terms and companies will still jump at the chance to participate in the iPod+iTunes ecosystem. Surging Mac sales (and sales into new markets, ie. “iTV,” “iPhone,” etc.) will more than make up for any iPod and iTunes revenue losses engendered by FairPlay licensing (remember, this licensing won’t happen for quite some time).

Apple can quickly and effectively make Microsoft Zune a very remote island that will have no chance of competing or generating meaningful revenue for Microsoft. The result will be that Apple controls the standard and owns the best-known brands while still selling the device(s) (iPod family) and the online content service (iTunes Store) that started it all. Microsoft would have no recourse and would shut down the isolated, unprofitable Zune brand.

Related articles:
Warner’s Middlebronfman: ‘We sell our songs through iPods, but we don’t have share of iPod revenue’ – October 05, 2005

Analysts: Microsoft Zune may end up being a flop – November 08, 2006
Are 58% of iPod owners really thinking of a Zune switch? – November 08, 2006
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Newsweek Q&A: Apple CEO Steve Jobs discusses iPod’s impact, Microsoft’s Zune, and more – October 15, 2006
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73 Comments

  1. I can’t imagine that Jobs and Co. would cave in and do what Microsoft is doing. That would be horrible.

    I wonder how much of MS’s miniscule profit is going to Universal (and perhaps others)? I heard that perhaps they are even taking a loss on each item sold just to try and get ahead. This would put them even more “in the hole”.

    MDN: great; as in, this Zune thingy is going to be a _great flop_.

  2. “We felt that any business that’s built on the bedrock of music we should share in,” said Doug Morris, chief executive of Universal

    Chief Operating Officer Kevin Turner said in a speech at the Microsoft Worldwide Partner Conference: “Those people are not going to be allowed to take food off of our plate.”

    Any connection? Perhaps M$ thinks that certain companies have inalienable rights to profits in their respective industries.

  3. Do AM/FM radio makers share profits with music labels? No.

    ehhh, yes they do. They pay a royalty every time they play a song.

    But back to the original subject. Who gets hurt the most if Universal, or any other label, pulls their songs from iTunes?

    Apple has sold about 60,000,000 iPods and sold over 1,000,000,000 songs via iTunes At 65¢, label’s cut, Apple has paid them indirectly over $650,000,000. That’s about $11 per iPod and growing. Apple doesn’t make money from iTunes music sales.

    How long before the Zune can generate that kind of revenue for the labels? In my opinion, it won’t happen.

    That’s why MSFT is paying Universal a fee for every Zune sold. Universal has seen the same surveys that MSFT, and Apple, have seen, and they know that most songs on PCs are illegal. For the most part, the same is NOT true with iPod owners, AND Apple is a major source of revenue for the labels.

  4. Gregg Thurman,

    Radio makers do not pay royalties, radio stations do. The radio device profits go solely to the radio makers. Just as Apple does not pay royalties to the labels on iPod sales, but they do pay royalties on iTunes songs sold.

  5. I hate to be a prick, but can we confirm this? That sounds like a really stupid deal that even MSFT wouldn’t go for… unless they are making up for it in some way.

    After all, this is Reuters, the “Doctored Photos” organization.

    I’m just being skeptical here… I just dislike rumors.

  6. “To share hardware profits with the music labels makes no sense. Did phonograph makers share record player profits with music labels? No. Did Sony share Walkman profits with music labels? No. Do AM/FM radio makers share profits with music labels? No. Do TV makers share profits with TV networks and producers? No”

    ——————

    MDN,

    Did phonograph makers sell records that would only play on their phonograph? No.

    Did Sony sell cassette tapes that would only play on Walkmans? No.

    Do AM/FM radio makers broadcast radio signals that can only be received on their radios? No.

    Do TV manufactures produce programming that will only play on their TV’s? No

    Does Apple sell content (which is owned by the labels) that will only play on the iPod? YES.

  7. “MDN,

    Did phonograph makers sell records that would only play on their phonograph? No.

    Did Sony sell cassette tapes that would only play on Walkmans? No.

    Do AM/FM radio makers broadcast radio signals that can only be received on their radios? No.

    Do TV manufactures produce programming that will only play on their TV’s? No

    Does Apple sell content (which is owned by the labels) that will only play on the iPod? YES.”

    I fail to see your point. The reason iTunes-purchased songs only play on an iPod is because the labels asked for DRM. And don’t forget, the iPod was out before the iTunes Music Store.

    So again, what was your point?

  8. I see your point, Advocate. However, cannot iPods also play the same MP3 files that play on ever other brand of mp3 player? The answer is a resounding YES!

    Even if a consumer buys an iPod without intending to use the iTunes Store, under a similar deal, Apple would be required to pay a record label money. That seems absurd.

    It is true that the content Apple sells will only play on the iPod. However, the iPod is a universal playback device just like all the other hardware you mentioned. It just so happens that it can also play a proprietary format.

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